The Supreme Court of China recently delivered a ruling on the application of Chapter 9 of the Chinese Maritime Code (CMC) [N1] dealing mainly with disputes arising out of salvage at sea – to contracts for salvage based on pre-agreed emergency response tariff rates (Pre-agreed Rates Salvage).
Unlike the “no cure, no pay” salvage regime, Pre-agreed Rates Salvage means that when entering into a salvage contract, the shipowners would usually be presented with a published rate sheet showing an hourly tariff rate for labour and daily costs for various pieces of salvage equipment/vessel. There would be a breakdown for each part of the salvage work, and the salvage remuneration would be charged based on the above tariff rates.
Pre-agreed Rates Salvage has become increasingly popular in the shipping industry as, in contrast to the “no cure, no pay” contractual salvage arrangement, both the owners and the salvors can control and balance their risks and costs more efficiently under the pre-agreed rate basis. However, the question of whether this type of salvage is governed by the CMC has become a hotly debated issue in China.
In order to provide guidance to the lower courts, the Supreme Court of China heard a petition on 7 July 2016 related to Pre-agreed Rates Salvage [N2]2. The three-seat tribunal was headed by the deputy chief judge.
The basic facts of the petition case were straightforward. Following a grounding incident, salvors and owners entered into a salvage contract, agreeing that the salvage remuneration should be paid to the salvors based on the agreed rates, regardless of the result of the salvage operation. The contract was governed by Chinese laws and subject to the jurisdiction of competent Chinese court.
First instance and appeal decisions
In the first instance trial before the Guangzhou Maritime Court, the judge ruled in the salvors’ favour, and the owners were required to pay the full salvage fees calculated on the basis of the agreement.
However, the appellate court (Guangdong Provincial Higher People’s Court), thereafter, handed down a decision ruling that the owners were only obliged to pay the salvage fees proportionally (salved value of the vessel / total salved value), and that the salvors should sue the owners of the other salved property to pursue the remaining part of the salvage fees. The legal basis for such ruling was Article 183 of the CMC, which provides as follows:
The salvage reward shall be paid by the owners of the salved ship and other property in accordance with the respective proportions which the salved values of the ship and other property bear to the total salved value.
This ruling reignited the debate. Some scholars and lawyers took the view that the CMC should apply equally to both “no cure, no pay” contractual salvage and Pre-agreed Rates Salvage, as the CMC does not limit its application to “no cure, no pay” salvage.
According to Article 171 of the CMC:
The provisions of this Chapter shall apply to salvage operations rendered at sea or any other navigable waters adjacent thereto to ships and other property in distress.
However, others believed that certain provisions in Chapter 9, such as Article 180, indicated that the CMC was not intended to apply to Pre-agreed Rates Salvage at all.
Following a five-hour hearing, the deputy chief judge ruled that, as there were no specific CMC provisions setting out the rights and obligations of parties involved in Pre-agreed Rates Salvage, Chinese contract law should be applied to determine the owners’ obligation to pay the salvage fees; the decision of the first instance court was therefore correct, and the judgment issued by the Guangzhou Maritime Court should be upheld.
The full text of the Supreme Court judgment is not currently available; however, the Supreme Court announcement establishes that CMC salvage-related provisions concerning the parties’ obligations and rights are not applicable to Pre-agreed Rates Salvage.
It should be noted that China is a civil law country and, consequently, the judgment issued by the Supreme Court does not have binding force, in theory. However, this decision is likely to be followed by the lower courts, including the ten Maritime Courts which are the courts of first instance for all maritime related claims in China. Therefore, it could be argued that the Supreme Court judgment has set out a “binding precedent” for Pre-agreed Rates Salvage contracts which are governed by Chinese law. Obviously, this ruling would be welcomed by salvors, as for such type of salvage, they are now in a stronger position to claim full amount of salvage fees from the contracting shipowners, which could save significant costs and time for salvors.
N1- The CMC, which came into effect in 1993, is China’s most significant piece of legislation governing maritime issues.
N2- Chinese courts adopt the system of “Finality of Judgment by Two Trials”. For maritime matters, the first instance trial would be conducted before the special maritime courts which are located in 10 different port cities and the appeal (second instance trial) would be heard by their respective provincial higher people’s courts. In addition to this system, China also adopts a “Petition” mechanism, under which the aggrieved party may petition to a court (for maritime matter, it would be the Supreme Court) higher than the one which hands down the final judgment to remand the case for a retrial or to correct the mistake and amend the judgment accordingly.